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Industry-wide
success, solid forecasts for processing demand and readily available
credit have created a favorable environment for capital investment
by North American service centers.
By
Dan Markham,
Senior Editor
Sidebars
and Tables:
Backed
by solid financial returns in the past couple years, metals service
center executives believe now is a fine time to reinvest some of
those gains.
“Most
of us held off during 2001-02. Everybody was cutting back on capital
expenditures,” recalls Gregg Mollins of Reliance Steel &
Aluminum Co. “Now that our business is doing well, it’s
time.”
Indeed,
the industry’s strong performance and projections of solid
GDP growth for the U.S. economy have built a good climate for spending.
North American service center executives contacted by Metal Center
News project similar or greater levels of spending on capital equipment
in 2006 compared to the previous year.
Then
there’s Reliance. In 2006, Reliance expects to nearly double
its 2005 outlay.
“Our
budget is going to be a little more than $90 million,” says
Mollins, Reliance president and chief operating officer. “It’s
almost twice our highest ever, $48 million in 2005.”
Reliance
will put that money toward expansion at some facilities, converting
some leased properties to full ownership, and purchasing plenty
of processing equipment.
Los
Angeles-based Reliance figures to be the big spender, but it’s
not the only service center willing to invest hefty sums during
the year.
Ryerson
Inc., Chicago, may spend more than twice as much as it did in 2005.
The nation’s largest service center company has budgeted between
$50 million and $70 million for capital improvements this year,
well above the $33 million it spent last year.
“Last
year was a little less than normal because we acquired Integris,”
says Terry Rogers, vice president of finance and treasurer, noting
that Ryerson spent much of 2006 sorting through the integration
of Integris operations.
It’s
not just the biggest players that will be making big investments
in 2006. Steel Warehouse Co., South Bend, Ind., has two major capital
expenditures on its schedule. The company is installing a temper
mill cut-to-length line at a new facility in Chattanooga, Tenn.
Another temper mill line is going in at a greenfield expansion project
in Monterrey, Mexico.
“Two
big projects in one year is really heavy for us,” says Dave
Lerman, chairman and CEO of Steel Warehouse. The Chattanooga project
alone will top $12 million.
Lerman,
and other executives, note that it’s important to reinvest
in their operations when financial conditions present the best opportunity.
“We’ve
had some strong profit years. We’re financing out of a combination
of retained earnings and increased credit lines because we’ve
shown such strong performance,” Lerman says.
Though
lenders viewed service centers cautiously in the early part of the
decade, their eyes-and checkbooks—have been opened by the steel
industry’s strong performance.
“[The
industry] went from the outhouse to the White House,” Lerman
says. “You can see it a lot more with the public companies,
but I think it’s true with the private companies, too. There’s
a lot more respect for the steel industry.”
O’Neal
Steel’s Bill Jones, president and CEO of another private company,
agrees that credit is more readily available, provided the company
has the financial performance to back it up.
“As
a privately owned company with no access to the capital markets,
it is a challenge for us,” Jones says. “But as long as
your balance sheet is strong, as long as your profitability is good,
as long as your investments are strategic, money is available.”
Jones
places capital spending under the broader umbrella of “investments.”
He says O’Neal’s expenditures break down into new or upgraded
processing equipment, technology and automation, and acquisitions.
The latter is “not cap ex in the true sense, but it is certainly
investment,” he says.
O’Neal
Steel (which includes Leeco, TW Metals, Timberline and Metalwest)
has budgeted more in 2006 than it did in 2005, and Jones expects
that trend to continue. The 2006 budget leaves a little wiggle room,
he adds, allowing the company some flexibility to meet unplanned
needs. “We leave some room for additional cap ex so we can
be entrepreneurial, we can be reactive and we can be flexible to
customer needs.”
Flexibility
seems to be a key concern for many service center executives. While
many have budgets that closely align with depreciation, few are
tied to such a figure.
“There
are formulas people use with depreciation,” says Michael D.
Siegal, chairman and CEO of Olympic Steel, Bedford Heights, Ohio.
“We don’t. We’ll jump on the opportunity whether
it’s more or less than depreciation. We’re not restraining
ourselves.”
Joseph
Bellino, chief financial officer at Steel Technologies, Louisville,
Ky., says his company’s budget often is far removed from depreciation
totals. The company is budgeted to spend $15 million on normal expenditures
this year and an additional $10 million on a greenfield operation
in Juarez, Mexico. Depreciation is estimated at $16 million.
Steel
Technologies has earmarked most of its 2006 money toward three major
facilities expansions. In addition to the Juarez building, the company
will purchase new equipment for its Berkeley, S.C., plant; add a
leveler to the coil-prep station at its Ghent, Ky., facility; and
add a larger slitter in Canton, Mich.
“It’s a discretionary capital expenditure program. In
a period of weaker economic demand like we saw in 2001-02, we pared
back our capital expenditures to the $7 million level, even though
we had depreciation at $13 or $14 million,” he says.
In
contrast, the capital budget at Marmon/Keystone Corp., Butler, Pa.,
is more systematic and predictable, says President Norman Gottschalk.
“It really is stable, unless we’re going to build a facility,”
he says. “The Marmon Group [Marmon/Keystone’s parent company]
has always pushed, in good times and bad times, to make sure the
buildings are taken care of and the equipment is in top shape. We
have a complete replacement system. We just replace so many per
year.”
The
one area where Marmon/Keystone may deviate is with its truck fleet,
replacing units ahead of schedule to beat the EPA’s new engine
emission requirements in 2007, which will add significantly to the
cost of each vehicle.
“Other
than that, we’re sort of on auto pilot,” Gottschalk says.
At O’Neal Steel and other service centers, the cap ex total
is determined after a considerable amount of discussion, lobbying
and, ultimately, compromise.
“It’s
a ground up approach for our district management and region management,
and eventually executive management, to look at what our cap ex
needs will be. It’s sort of a negotiating process to come to
an agreement by the end of the year on what the expense for the
next year will be,” Jones says. “Not everyone gets everything
they want. But if it’s justified, we normally find a way to
do it.”
That
seems to be the defining characteristic at ThyssenKrupp Materials
NA Inc., Southfield, Mich.
“Capital
is not an unlimited resource. There are guidelines provided to us
by our German parent company, but they have made it known that the
North American marketplace is a very significant opportunity for
them, with a special emphasis on the service business,” says
Malcolm Gill, senior vice president for corporate affairs at TK
Materials NA.
Even
with more than $90 million committed to expenditures, Reliance is
forced to make choices.
“Through
conversations, we get down to a realistic expectation of what we
need,” Mollins says. “We narrowed it down from well over
$100 million.”
In
the last two years, many of Reliance’s major expenditures were
devoted to projects at subsidiary Phoenix Metals of Norcross, Ga.
In November 2005, Reliance opened a division of Phoenix Metals in
Cincinnati and expects to open another in Philadelphia this month.
Two expansions of Phoenix Metals plants are scheduled in Birmingham,
Ala., and Charlotte, N.C.
One
division that isn’t included in Reliance’s 2006 budget
is recent acquisition Earle M. Jorgensen Co. The Lynwood Calif.-based
company had already set a $19 million capital budget for 2006 before
the purchase by Reliance, including $5 million for construction
of a service center in Portland, Ore.
Some
service centers can fund all their capital needs out of cash flow,
others use some combination of cash and credit. More important than
how budgets are funded is the strategic value of the equipment purchased,
say executives. Capital investment is about positioning a company
and its capabilities for future competition.
“We’re
not very creative when it comes to [funding],” says Jones.
“We are fairly creative in what we invest in.”
More
Cap Ex Funds Earmarked for IT
While capital spending conjures images of levelers, slitters and
other processing equipment, companies are also devoting an increasing
percentage to information technology and other sources of automation.
CEO
Michael Goldberg of A.M. Castle & Co., Franklin Park, Ill.,
says that his company divides capital expenditures into three categories:
information systems, processing and equipment. “The spending
is fairly evenly distributed.”
The
same is true at Philadelphia-based TW Metals. President and CEO
Jack Elrod says that information technology likely represents more
than one-third of the company’s cap ex budget.
Though
much of TW’s recent IT spending has been part of a three-year
project, Elrod doesn’t expect that number to drop dramatically
in the years to come.
“We’re always on a rolling replacement of computers. I
think in today’s world, it’s always going to be a major
part of your cap ex budget,” Elrod says.
TW
Metal’s parent company, O’Neal Steel, also is active in
improving its IT systems. O’Neal has signed a three-year, $2
million contract with AT&T to upgrade the company’s network
to an Internet Protocol Virtual Private Network. With the IP VPN,
O’Neal will be able to consolidate multiple legacy network
technologies onto a single network infrastructure that can carry
voice, video and other types of data.
“It
seemed very innovative and, frankly, very beneficial to us,”
says Jones.
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